Sorry folks, this is not an old tradition
If you read any articles about the "elf on the shelf," the writers usually will include a sentence or two about this being an "old Christmas tradition."
It isn't. The idea comes from a self-published book that came out in 2005. Hardly an "old tradition."
https://en.wikipedia.org/wiki/The_Elf_on_the_Shelf
My family had an elf decoration back in the late 1960s or early 1970s that looked almost exactly like the one now supplied with the story book. I would be willing to wager that this particular elf design goes back even further.
And we were never told that it was "watching us."